Tredegar recorded tax expense of $5.2 million on pretax net income of $53.2 million in the first six months of 2017. Therefore, the effective tax rate in the first six months of 2017 was 9.9%, compared to 29.8% in the first six months of 2016. The significant differences between the U.S. federal statutory rate and the effective income tax rate for the six months ended June 30, 2017 and 2016 are as follows:



	Percent of Income Before Income Taxes
Six Months Ended June 30,	2017		2016
Income tax expense at federal statutory rate	35.0		35.0
Foreign rate differences	1.7		0.1
State taxes, net of federal income tax benefit	1.2		0.5
Changes in estimates related to prior year tax provision	0.6		(1.3	)
Valuation allowance for foreign operating loss carry-forwards	0.5		0.3
Non-deductible expenses	0.4		1.6
Income tax contingency accruals and tax settlements	0.2		1.5
Valuation allowance for capital loss carry-forwards	—		(0.7	)
Unremitted earnings from foreign operations	(0.2	)	(2.0	)
Research and development tax credit	(0.5	)	(1.6	)
Domestic production activities deduction	(0.7	)	(2.2	)
Remitted earnings from foreign operations	(0.8	)	(0.8	)
Foreign investment write-up	(4.4	)	(0.6	)
Settlement of Terphane acquisition escrow	(7.9	)	—
Worthless stock deduction	(15.2	)	—
Effective income tax rate	9.9		29.8

During the second quarter of 2017, the Company initiated a plan to liquidate for tax purposes one of its domestic subsidiaries, which will allow it to claim an income tax benefit on the write-off of the stock basis of one of the Company’s U.S. subsidiaries (“worthless stock deduction”) on its 2017 federal income tax return. The Company recorded an income tax benefit during the second quarter of 2017 of $8.1 million related to the worthless stock deduction, net of valuation allowances and accrual for uncertain tax positions. Also during the second quarter of 2017, the Company recognized a net tax benefit of $0.4 million associated with additional U.S. tax related to the repatriation of cash from Brazil in the third quarter of 2016 offset by the reversal of related tax contingencies.

Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries. Prior to the second quarter of 2016, deferred U.S. federal income taxes had not been recorded for the undistributed earnings for Terphane Ltda. because the Company had intended to permanently reinvest these earnings. Due to concerns about the political and economic conditions in Brazil, Terphane Ltda. began making cash distributions to the Company in 2016. During the second quarter of 2016, Terphane Ltda. paid a dividend of $10.7 million to the Company. Because of the accumulation of significant losses related to foreign currency translations at Terphane Ltda., there were no unrecorded deferred tax liabilities associated with the U.S. federal income taxes and foreign withholding taxes on Terphane Ltda.’s undistributed earnings as of June 30, 2017 and December 31, 2016.

The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane Holdings LLC’s (“Terphane”) manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to 15.25% levied on the operating profit on certain of its products. The incentives have been granted for a 10-year period, which has a retroactive commencement date of January 1, 2015. No benefit was recognized from these tax incentives in the first six months of 2017 or 2016.

Income taxes in 2017 included a partial reversal of a valuation allowance of less than $0.1 million related to the expected limitations on the utilization of assumed capital losses on certain investments that were recognized in prior years. Income taxes in 2016 included the partial reversal of a valuation allowance of $0.1 million related to the expected limitations on the utilization of assumed capital losses on certain investments. The Company had a valuation allowance for excess capital losses from investments and other related items of $11.2 million at June 30, 2017. Tredegar continues to evaluate opportunities to utilize these loss carryforwards prior to their expiration at various dates in the future. As events and circumstances warrant, allowances will be reversed when it is more likely than not that future taxable income will exceed deductible amounts, thereby resulting in the realization of deferred tax assets.

Tredegar and its subsidiaries file income tax returns in the U.S., various states and jurisdictions outside the U.S. With few exceptions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2013.